Effective states & engaged societies the nature of statal policy and institutional reform


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Effective states & engaged societies the nature of statal policy and institutional reform

  1. 1. Managing Developmental States:Policy and Institutional Reforms in Africa An Ethiopian case Comparative Public Policy – Series III Effective States & Engaged Societies: BT Costantinos, PhD School of Graduate Studies, Department of Public Management and Policy, College of Management, Information and Economic Sciences, Addis Ababa University Conference lecture notes National Conference on Management for Effectiveness, Efficiency and Ethics Ethiopian Management Institute June 30-July 1, 2011
  2. 2. CostantinosAbstractA key distinction, which runs through much of in the history of political theory, is between the stew-ardship/ guardianship on the one hand and guiding/steering responsibilities of the state on theother. Over the centuries, these two images i.e. the shepherd and the helmsman - have been at theheart of many political governance controversies. Although neither guardianship nor guiding can bedischarged effectively in isolation, some writers advocate one and others the other as the primaryresponsibility of the state. Developmentalists emphasize stewardship while neo-classical economistsaugur its guiding functions. The research questions focus on how a developmental state can emergein Africa. The findings zero on the political theory on the nature of the developmental state, opera-tionalising rules, dimensions of organisations, and sustainable reform processes aimed at reinvent-ing the quality of training and education in human qualities development to build a core civil service:focusing on political, social and economic governance of the state’s oversight responsibilities. Ethio-pia can use its massive statal resources held by government to finance its infrastructure needs onceand for all…for this, leadership capable of creating and articulating clear developmental ideology andvision should build an elite developmentalist coalition that has to be committed to industrializationand creation of more opportunities for productive and high income activities in the formal sectorContents1. Introduction…12. Research questions…23. The Developmental State: Definition: tautology, redundancy or pleonasm …2 Ideological forces behind developmentalist dirigisme…24. Rise and fall of developmental states: The Japanese Miracle…3 The East Asian Tigers…55. African Developmental States: Analytical disconnects …5 Good practices - wrong lessons …6 Government and market failure …7 Neo-patrimonialism and rent seeking…86. A Global Order emerging: Self-fulfilling predicaments…10 rolling back the state…117. New public management NPM…12 The Washington Consensus…12 The New Structural Economics…13 Trade and Investment Policy Priorities…148. Can Ethiopia nurture a developmental state …149. Conclusion and recommendations…16 9.1. The developmental state and avoiding its pitfalls…16 9.2. Enhancing the state’s role in transformation…17 9.3. De-linking of the state from rent-seekers…17 9.4. Nurturing a socially responsible national bourgeoisie…17 9.5. A case for continuous innovation ideology and agency in Ethiopia…19 9.5.1. Constructing a developmental state in Ethiopia…19 9.5.2. Governing a Development State in Ethiopia …2010. Epilogue…23 References…24 AcronymsAMP Alternative Modes of Production IFI International Financial InstitutionsBWI Bretton Woods Institutions HPAEs High-Performance Asian EconomiesDS Developmental State IMF International Monetary FundSAP Structural Adjustment Programmes NPM New public managementSSA Sub-Saharan Africa SOE S State-owned enterprisesMITI Ministry of International Trade and Industry WTO World Trade OrganisationDisclaimer: the conference lecture is not a publication… it does not represent the views of the institutions the authoris affiliated with. The lecture cannot be circulated without the permission of EMI
  3. 3. 1. Introduction Human development and human security in Africa faces many limitations in the sphere of institutional development. On several occasions, the author has been on record on several questions as to whether we have so far been effective in promoting and institutionalising empowerment among our populace or have the commitment to professional principles and practices that are lacking with clear evidence in the internal affairs of many programmes focussing on human development. Politicians, development researchers and practitioners do not show sufficient awareness of the difficult socio-political choices facing us if we are to become more involved in addressing the nation’s development challenges. The influence of decades of colonial, militarist and socialist legacy over Africa’s economic administration and management, that is manifested in an activist impulse which calls for politicians to be highly polemical and combative in their mode of ‘communication, to be sensitive but not particularly responsive to criticism of goals and strategies; shows up in the tendency to offer solutions in tight, formulaic terms, for the most part avoiding the uncertainty of their pluralism, negotiated framing, and to resist the opening up of economic, social and political governance reform aims and purposes for alternative formulations. The points made above regarding the identification of problems of development management apply to the setting of goals and tasks for problem-solving activities. The solutions, like the challenges, can be seen in large part as elements, features and effects of state policies that have taken shape and come into play as the articulation and operation of particular doctrines. The first round of the African renaissance that was launched with the liberation of Africa from shackles of European colonialism spawned a whole branch of economic theory: develop- ment economics. Because ‘poor countries were intrinsically different from rich ones, they needed a new economic model; different from the modernisation and subject to Marxian dependency and AMP theories. Some even argued that the self-interested, rational individual (homo economicus) could not exist in agrarian-based and predominantly tribal and ethnic societies. Much of this was ill-advised, and economic rationale based on it created developmental states that are fragile, failed or failing. Instead of the much touted African Renaissance, the result was botched gubernatorial regimes with huge, bankrupt bureaucracies riddled with sleaze, gargan- tuan budget deficits and unbridled inflation. Failed states therefore bred a new genre of rent- seeking prebendary states and profiteers. As opposed to the developmentalists, promoters of new endogenous growth theory argue that there is conditional convergence -- catch-up effect for poor nations to grow faster than the rich ones; if we held constant such factors as fertility rate, human capital and policies proxied by the share of public spending in GDP. Neo-classical economics underpins that poor countries grow faster than richer ones as there are diminishing returns on capital for the rich. Nonetheless, since, in reality, all demographic, policy and human capital factors are not constant, increasing economic growth can only be achieved by making markets more efficient. Hence, the eighties championed supply-side policies by attacking Keynesian demand management; as pumping up demand without functioning markets simply led to higher inflation. Economic growth increases only when markets were able to operate more freely. Thus they pursued policies of deregulation, liberalisation and privatisation and encouraged free trade and to reduce unemployment, they tried to increase the efficiency of the jobs market by cutting income tax rates and attacking legal impediments to labour market flexibility. While most Tiger economies reversed these policies and undo the damage of developmentalist and statist economic models; African countries have remained hung-up on that model. This brings up the fundamental weaknesses of these crises of development paradigms that are not in the answers they provide but in the new questions they engender and challenge us with. There is convincing evidence that societies evolved complex and so- phisticated social and managerial mechanism to exist relatively comfortably even in rigorous economic conditions. Development economics of the past few decades has brought fundamentals changes to indigenous production systems. These have meant new definitions of vulnerability and a loss of effectiveness by traditional social managerial mechanisms and a dirigist develop- mentalist model that still has to show some fruits. The conference lecture focuses on the Devel- opmental State, the rise and fall of developmental states, the African vision and mission of Develop- mental States, and can Ethiopia nurture a developmental state?
  4. 4. Costantinos2. Research questions: The research questions are 2.1. How can a developmental state emerge? What are its characteristics and functions? 2.2. Is the model recommended for all African countries? 2.3. Did the concept evolve into solid development theory so far? 2.4. Who determines public interests? How are they articulated and aggregated? 2.5. How do we ensure it can effectively guide economic transformation and development? 2.6. How can we ensure that it is accountable and that it acts in the interest of its citizens?3. The Developmental State: 3.1. Definition: Tautology, redundancy or pleonasm: The developmental state is an ideology-agency nexus that distinguishes it from other forms of states. Ideologically, its foundation is conjured up in ensuring high rates of accu- mulation and industrialisation. Such a state establishes …its principle of legitimacy is its ability to promote sustained development, the steady high rates of economic growth and structural change in the productive system, both domestically and in its relationship internationally (Castells, 1992: 55). At this ideational level, the élite must be able to establish an ideological hegemony, so that its developmental project becomes, in a Gramiscian sense, a hegemonic project to which key actors in the nation adhere voluntarily. The state-structure side of the definition emphasises capacity to implement policies sagaciously and effectively; determined by insti- tutional, technical, administrative and political capacity. Under-girding all these is the autonomy of the state from social forces so that it can use these capacities to devise long- term policies unencumbered by claims of myopic ‘gangs’. (Makandiware, 2005) A strong feature of the modernisation literature is the quest for a strong state in such a process, usually assumed that such a state should be strong and enjoy relative autonomy from key social actors. Such a state was contrasted to what Myrdal (1968) referred to as the soft state that had neither the administrative capacity nor the political wherewithal to push through its developmental project. In addition, the state must have some social anchoring that prevents it from using its autonomy in a predatory manner and enables it to gain adhesion of key social actors. As formulated, the definition of the developmental state runs the risk of being tautological since evidence that the state is developmental is often drawn deductively from the performance of the economy. This produces a definition of a state as developmental if the economy is developing, and equates economic success to state strength while measuring the latter by the presumed out- comes of its policies. It has led to myopic concentration of analysis around success to the neglect of the trial and error nature of policy-making even in the most successful cases. If a developmental state is not be deified into some kind of omnipotent and omniscient le- viathan that always gets what it wants, then the definition must include situations in which exogenous structural dynamics and unforeseen factors can torpedo developmental com- mitments and efforts by the state. (Makandiware, 2005) This allows room for poor performance due to exogenous factors, miscalculation or plain bad luck. At times, a government’s political will and technical capacity may simply prove inadequate to fend off exogenous forces. Africa may have examples of states whose performance up until the mid-1970s would have qualified them as developmental in the sense conveyed by current definitions, but which now seem anti-developmental because the hard times brought the economic expansion of their countries to a halt. Recognition of epi- sodes and possibilities of failure leads us to a definition as one whose ideological underpin- nings are developmental and one that seriously attempts to deploy its political resources to the task of economic development. (Makandiware, 2005) 3.2. Ideological forces behind the developmentalist dirigisme The main force behind the developmentalist ideology has usually been nationalism, in- ducing nations to seek to catch up with countries considered as more developed, to firm the resource base for national defence and security, etc. It is essential to stress these ideological underpinnings of state policies for it is these that provide the rationale for some of the poli-2 |Policy and Institutional Reforms in Developmental States, BTC 2011
  5. 5. Costantinos cies and give legitimacy to otherwise unpalatable sacrifices, not only because they serve as the opium of the masses, but also because they knead together the ruling class. The central- ity of ideology also points to the naïveté of the de-politicised quest for technocratic govern- ance, now pushed by IFIs, in which a technocracy is supposed to carry out policies that are good for the nation for no apparent reason, not even self-serving ones. Before the WWII, France had a relatively fragmented capitalist economic system. As the War laid France to waste, post-war governments sought rational, efficient economic devel- opment, with the long-term goal of matching the highly-developed and technologically- advanced economies. The main French tool was indicative central planning, through plans designed by the Commissariat général du plan. Unlike the governments of the Soviet Bloc, however, the French government never owned more than a minority of industry, and did not seek to enforce its economic directions in authoritarian ways; instead, it used various incentives. In addition, France never ceased to be a mainly capitalist country. Because French industry prior to the Second World War was weak due to fragmentation, the French government encouraged mergers and the formation of "national champions", large industry groups backed by the government. Two areas where the French government sought greater control were infrastructure and the transportation system. The French government owned the national railway company SNCF, the national electricity utility EDF, the national natural gas utility GDF, the national airline Air France; phone and postal services were operated as the PTT administration. In- terestingly, the government chose to devolve the construction of most auto-routes (free- ways) to semi-private companies rather than to administer them itself. Other areas where the French government directly intervened were defence, nuclear and aerospace industries. This development was marked by volontarisme, the belief that difficulties could be over- come through willpower and ingenuity. For instance, following the 1973 energy crisis, the saying in France we dont have oil, but we have ideas was coined. Volontarisme empha- sized modernization, resulting in a variety of ambitious state plans. Examples of this trend include the extensive use of nuclear energy (close to 80% of French electrical consump- tion), the Minitel, an early online system for the masses, and the TGV, a high-speed rail network. The development of French dirigisme coincided with the development of meri- tocratic technocracy: the École Nationale dAdministration supplied the state with high-level administrators, while leadership positions in industry were staffed with Corps of Mines state engineers and other personnel trained at the École Polytechnique. During the 1945-1975 period, France experienced unprecedented economic growth (4.5% on average) and a demographic boom, leading to the coinage of the term Trente Glorieuses (Thirty Glo- rious [years]). Dirigisme flourished under the centre-right governments. In 1981, Socialists nationalised industries and banks, however, in 1983 the initial bad economic results forced the government to renounce dirigisme and start the era of rigueur. Dirigisme has remained out of favour subsequently.14. The rise and fall of the developmental state: 4.1. The Japanese and East Asian Miracle The idea of the developmental state is most closely associated with Chalmers Johnson and his seminal analysis of Japan’s very rapid, highly successful post-war reconstruction and (re)industrialisation. Johnson, Chalmers (1982) Johnson’s central contention was that Japan’s quite remarkable and historically unparalleled industrial renaissance was neither a fluke nor inevitable, but a consequence of the efforts of a ‘plan rational’ state. A plan rational was one that was determined to influence the direction and pace of economic development 1 Economic dirigisme has been described as an inherent aspect of fascist economies by one author, Ivan T. Berend(2005) in his book An Economic History of Twentieth-Century Europe. However, the Fascist Benito Mussolini, FranciscoFranco and Adolf Hitler are a varied mix of elements from numerous philosophies, including nationalism, authoritarianism,militarism, corporatism, collectivism, totalitarianism, and anti-communism. (Baker, David, 2006). Regardless of the differ-ing components found in the historic fascist state, the opposition to liberalism including democracy and equality before thelaw are agreed qualities of all. Dirigisme has been brought up as a politico-economic scheme at odds with laissez-faire capi-talism in the context of French colonies.3 |Policy and Institutional Reforms in Developmental States, BTC 2011
  6. 6. Costantinos by directly intervening in the development process, rather than relying on the uncoordi- nated influence of market forces to allocate economic resources. The developmental state took it upon itself the task of establishing ‘substantive social and economic goals’ with which to guide the processes of development and social mobilisation. (Ibid, MITI and the Japa- nese Miracle, p 23). The most important of these goals in Japan’s case was the reconstruc- tion of its industrial capacity; a process made easier by a widespread social consensus about the importance of economic development. (Makandiware, 2005) At the centre of the Japanese developmental state - and of its most successful imitators in Taiwan and South Korea - was a highly competent bureaucracy dedicated to devising and implementing a planned process of economic development. One of the key elements of a developmental state - and an essential prerequisite for managing the developmental proc- ess – is the existence of a pilot agency, like Japan’s celebrated MITI, which was the main focus of Johnson’s original analysis. The pilot agency is charged with task of directing the course of development itself, and employs and devises a range of policy tools to ensure that indigenous business is both nurtured and managed in the overall ‘national interest’.2 In those countries that have had the ‘state capacity’,3 or the ability to devise and implement various industry policies – primarily the aforementioned Northeast Asian states and Singa- pore – they have also had extensive, relatively efficient bureaucracies, staffed by the nation’s brightest and best. The claim that developmental states may still be an essential component of successful development is contentious, but strongly supported by the historical record. Significantly, both the UK and US, seeming paragons of market, rather than state- led development, and latter day champions of the free market or neoliberal model, enjoyed state assistance in their initial industrialising phase. Chang, Ha-Joon (2002) Indeed, not only is infant industry protection of a sort enjoyed by nineteenth century Britain and America, and twentieth century Japan, still a prerequisite of successful indige- nous industrialisation, but attempting to outlaw such practices through the currently domi- nant neoliberal agenda championed by the IFIs, amounts to ‘kicking away the ladder’ to de- velopment. The potential utility of the developmental state has been undermined as much by a shift in the dominant discourse about optimal or appropriate modes of development as it has by any inherent failings. In other words, the continuing utility or feasibility of the de- velopmental state many depend as much on external geopolitical factors as it does on any specifically domestic ones. This possibility is graphically illustrated in the rise and demise of the developmental state in Japan. Japan’s place as a potential bulwark against communist expansion in East Asia in the aftermath of the Second World War meant that it received especially favourable treatment from the US – a coun- try that emerged in the war’s aftermath as the hegemonic power of the era. The US’s preoccupation with containing communism and nurturing proto capital- ist democracies meant that Japan was a beneficiary of American aid and the stimula- tory economic impact of the US’s military activities in Korea on the one hand, and of a tolerant American attitude to domestic reform in Japan on the other. Indeed, Johnson dryly notes that in the post-war period Japan ‘gave a virtuoso performance of how to extract the most from the United States while paying the least to support its global strategies’ (Johnson, C. 1999). Significantly, it was a performance that was widely emulated across the region, and given as structural consolidation by Japan’s own success. Indeed, Japanese economists were at the forefront of promulgating the ‘flying geese theory’ of regional development, in which Japan would pull other economies in its wake.4 Mark Besson in his paper, the rise 2 For one of the most authoritative and influential accounts of this sort of development in Northeast Asia, see Wade,Robert (1990) Governing the Market: Economic Theory and the Role of Government in East Asian Industrialisation,(Princeton University Press, Princeton). 3 For a very useful discussion of state capacity see, Polidano, C (2000) ‘Measuring public sector capacity’, World Devel-opment, 28 (5): 805-22. 4 On the fling geese theory and its impact see Gangopadhyay, P (1998) ‘Patterns of trade, investment and migration inthe Asia-Pacific region’, in Thompson, G. (ed.), Economic Dynamism in the Asia-Pacific, (London: Routledge): 20-54. For a4 |Policy and Institutional Reforms in Developmental States, BTC 2011
  7. 7. Costantinos and fall of the developmental state5 states that in the aftermath of the WWII a number of features of the evolving international order were especially striking. Most obviously, the world divided into two implacably opposed ideologically and militarily opposed camps – a structurally entrenched bifurcation that was to distinguish post-war interna- tional relations for more than four decades. At the same time, an equally surprising and, ar- guably, important, but altogether more positive development occurred: much of East Asia began to rapidly industrialise and witnessed a concomitant and seemingly permanent rise in living standards across the region as a consequence. East Asia’s transformation was surprising because even as late as the 1960s and 1970s, influential strands of radical scholarship continued to question whether the ‘peripheral’ parts of an increasingly inter-connected global economy could ever hope to escape the pre- dations and exploitation of the established industrial heartlands of Western Europe and North America6. In addition yet the fact that Japan had rapidly re-established itself as East Asia’s pre-eminent industrial economy appeared to be unequivocal evidence that, not only was rapid economic development possible outside the established ‘core’ economies, but that such a processes might ultimately take on a regional and self-sustaining quality. Such heady optimism appeared to have a solid empirical basis throughout the 1960s, 1970s, and 1980s. Ironically, the increasingly positive, not to say self-deluding, sentiment that developed about ‘Asia’ in the 1990s encouraged a flood of speculative capital into the region, fuelling a rising tide of expectations and asset values as a consequence. A detailed analysis of the crisis is not possible here,7 but it is important to emphasise that one of the most important consequences of the crisis was to subject the entire East Asian development experience to a rapid and generally unfavourable reappraisal. The dis- tinctive role of the region’s interventionist political elites was the object of particular atten- tion as what were formerly seen as ‘strong’ states were now depicted as centres of self- serving ‘crony capitalism’. This remarkable change in the conventional wisdom about East Asian modes of governance was mirrored in, and drove, an externally imposed reform agenda - designed by the IMF, which was intended to completely reconfigure much that was distinctive about East Asian developmental states. The questions that emerged as a consequence of the crisis and its subsequent economic and political aftermath were: was the East Asian developmental state actually the cause of the crisis? Can it survive in the face of external reformist pressure in particular and in the face of competitive pressures generated by ‘globalisation’ more generally? Hence one must look more closely at the evolution and role of the developmental state in East Asia generally and at the way that this very distinctive institution has been understood in the theoretical literature.5. African Developmental States 5.1. Analytical disconnects One remarkable feature of the discourse on the state and development in Africa is the disjuncture between an analytical tradition that insists on the impossibility of developmen- tal states in Africa and a prescriptive literature that presupposes their existence. States whose capacity to pursue any national project is denied at one level (theoretical or diagnos- tic) are exhorted, at the prescriptive level, to assume roles that are, ex definicione, beyond their capacity or political will. Such states are urged to delink, reduce themselves, stabilise and privatise the economy, promote good governance and democratise themselves; creat- ing an enabling environment for the private sector, etc., in short to do the impossible. What we then have is, to paraphrase Gramci, the pessimism of the diagnosis and the op- timism of the prescription. Obviously such a contradictory position is unsatisfactory.critical view of the impact of Japan’s industrialisation on the region, see Bernard, M. and Ravenhill, J. (1995) ‘Beyond prod-uct cycles and flying geese: Regionalisation, hierarchy, and the industrialisation of East Asia’, World Politics, Vol. 47, No. 2,pp 171-209. 5 Based on Mark Beeson (2006) The vicissitudes and implications of East Asian interventionism 6 For an overview literature, see Roxborough, Ian (1979) Theories of Underdevelopment, (London: Macmillan) 7 There is by now a vast literature on the crisis. See, for example, Robison, R. et al (eds. 2000), Politics and Markets inthe Wake of the Asian Crisis, (London, Routledge).5 |Policy and Institutional Reforms in Developmental States, BTC 2011
  8. 8. Costantinos To attain some congruence between diagnosis and prescription, we need to retrace our steps back to the diagnosis. One can argue that neither Africa’s post-colonial history nor the actual practice engaged in by successful developmental states rules out the possibility of African developmental states capable of playing a more dynamic role than hitherto. This assertion has to contend with a whole intellectual tradition on the prospects of capitalist accumulation in Af- rica and the nature of African states and societies — a tradition characterised by the casu- alness with which assertions about such prospects are made, and the deterministic and ap- rioristic nature of the discourse rarely based on analysis of the actual experiences, but merely on first principles, ideological conviction or faith. Most of the analyses about African states that have led to so much despondency about prospects of development are based on invidious comparison between African states in cri- sis and developed nations that has occulted the state, making concrete analysis of its char- acter less important than the normative statements about what it should be; turning de- bates on the African state into the most pontifical and teleological of any theme. The Afri- can state is today the most demonised social institution, vilified for its weaknesses, its over-extension, its interference with the smooth functioning of the markets, its repres- sive character, its dependence on foreign powers, its ubiquity, its absence, etc. The state, once the cornerstone of development, is now the millstone around otherwise efficient markets. Early criticism of the state in Africa came from the neo-Marxists whose own epithets to describe the pathological condition of the African state included the petty bourgeois state, the neo-colonial state and the dependent state. The many epithets underscore the fall from grace of the African state. It is now argued that not only has the state become dysfunctional in terms of the larger societal issues, but also a real nuisance in la vie quotidienne of its citi- zens, as evidenced by the withdrawal from state-dominated economic and social spaces (Chazan, 1988a; Chazan, 1988b; Rothchild, 1994). Some even go so far as to conceive of develop- mental schemes that completely circumvent or marginalise the state as NGOs, private sec- tor and communities proceed almost surreptitiously addressing issues of poverty and de- velopment without the encumbrance of the state. 5.2. Good practices but wrong lessons: Not only has the spectacular success of the East Asian Four Tigers led to a re- reading of the role of the state in the development process, but it has also raised the ques- tion of replicability of their policies and experiences in other developing countries. The lessons drawn from these experiences differed and were often shaped by the pre-analytic predisposition of the observer. Earlier recognition of this performance of the Four Tigers was refracted through the prism of neo-liberalism so that the experience appeared shorn of all dirigisme and was cited as irrefutable evidence of the superiority of essentially laissez- faire policies. More specifically, reliance on market forces and the adoption of market- driven export-oriented development strategies was said to have led to efficient exploitation of the comparative advantage of these countries in cheap labour (Balassa, 1971; Little et al., 1970). The first presentation for African consumption of the lessons from Asia from the neo- liberal perspective was the Berg report (World Bank, 1981), which has been the definitive document on adjustment for 17 years. There have been amendments, subtractions, addi- tions and refinements of the argument, but as Adjustment in Africa (World Bank, 1994) clearly suggested, the World Bank was almost congenitally tied to the core argument of the Berg report with its faith in the market and a minimalist view of the state. The 1994 report insisted on the dichotomy made in policy-making between state and market in which these appeared as rival forms thus reviving Manichean discourse that had, for years, vitiated de- velopment planning in Africa. Subsequent analysis has shown that neo-classical reading of experiences of develop- ment in Asia has been tendentious, deliberately downplaying the role of the state in the success stories. Revisionist literature on the Asian experience presents a picture quite dif- ferent from that projected by neo-classical interpretation of that same experience. These6 |Policy and Institutional Reforms in Developmental States, BTC 2011
  9. 9. Costantinos countries were far from paragons of laissez-fairism and, instead, were highly dirigiste economies in which the states had governed markets to ensure high levels of accumulation, technology absorption and conquest of foreign markets. The general conclusion of this lit- erature is that market failure so prominent in development economics is still a problem that warrants government intervention and that since such failures differ in intensity, scope and location, a selective set of interventions is required.8 The most significant lesson has been the central role played by a developmental state in the process of development. This dirigiste Asian experience and theoretical developments in economics have revived interest in some of the issues that were central to development studies, unleashing what Krugman (1992) has called a counter-counter revolution. These is- sues include problems of human capital; possibilities of the state crowding in private in- vestment; market imperfections and failures, industrial policy, etc. In the African case, the failure of SAPs has compelled even the most dogmatic institutions to recognise the positive role the state can play in the process of development, beyond acting as a night watchman. In its book, Sub-Saharan Africa: From Crisis to Sustainable Growth, the World Bank (1989) acknowledged the importance of the state in managing development and social change, and brought back on the agenda the pro-active role of the state in development. However, the return of the state was now premised upon a whole series of proposals about good govern- ance. In Adjustment in Africa (World Bank, 1994) and Bureaucrats in Business (World Bank, 1995), the Bank retreated to its more familiar ideological terrain in which a developmental state borders on an oxymoron. One sees in the tortured logic of the presentation of the Asian miracle, especially with respect to industrial policy and its reduction of a complex set of pro-active state policies into a vacuous market friendliness. The lesson drawn for Africa by the World Bank was that, in the best of cases, development strategies or, more precisely, industrial policy was ei- ther superfluous or, where useful, merely simulated the market, which, in the opinion of some, would have done better without the interventions anyway. In the African case, two additional arguments were added: first, even if industrial policy had worked in the success- ful economies, African states were too weak and too prone to capture by vested interests, so that the pursuit of such polices would produce perverse outcomes. Second, the WTO trade régime most of the policies central to industrial policy were no longer acceptable. 5.3. Government and market failure: The economic crisis of the 1970s, the demise of the theoretical armour for state interven- tion, the ideological hegemony of neo-conservatism in key funding institutions and donor countries, the palpable failure of development planning in many countries, stagnation and the crisis of accumulation in the socialist countries and the changing mood towards poor countries (Afropessimism, etc.), the pessimism or cynicism of the development establish- ment about its counterparts in the recipient countries; all these pointed to government fail- ure as more insidious than the market failure that state policies had purportedly been de- signed to correct. However, although some of the arguments against state intervention are based on an idealised and dogmatic view of markets, there is now widespread acceptance of market failure on the grounds of economies of scale, imperfect information, etc. Consequently, the most important case against developmental states in Africa is not faith in flawless markets, but rather that whatever the degree and extent of market failure African states cannot correct them in ways that do not make things worse. What emerges in the literature is that what has obviously worked in other late industrialisers is simply a non- starter in Africa. While it is now admitted that the state has played a central role in the de- velopment of Asian countries, it is suggested that replication of the Asian experience is im- 8 Dirigisme is an economy in which the government exerts strong directive influence. While the term has occasionallybeen applied to centrally planned economies, where the state effectively controls both production and allocation of resources(in particular, to certain socialist economies where the means of production are assets of the state), it originally had neitherof these meanings when applied to France, and generally designates a mainly capitalist economy with strong economic par-ticipation by government. Most modern economies can be characterized as dirigiste to some degree – for instance, stateeconomic action may be exercised through subsidizing research and developing new technologies, or through governmentprocurement, especially military (i.e. a form of mixed economy). China is the clearest example.7 |Policy and Institutional Reforms in Developmental States, BTC 2011
  10. 10. Costantinos possible for Africa, because of the (a) dependence, (b) lack of ideology, (c) softness of the African state and its proneness to capture by special interest groups, (d) lack of technical and analytical capacity, (e) the changed international envi- ronment that did not permit protection of industrial policies, and (f) past poor record of performance. Peter Lewis, (1996) discussing replicability of the Asian model, states: While some aspects of this model (for instance, greater political insulation of eco- nomic policy makers) could reasonably be achieved in African countries, the extensive co-ordinated economic interventions of the East Asian states are well beyond the admin- istrative faculties of most African governments Similar sentiments are explicitly expressed by Callaghy (1993), who argues that African states lack the capacity to pursue the statist model of Asia since Africa is hemmed in as it tries to navigate between weak states and weak markets and to do so with open political structures. 5.4. Neo-patrimonialism and rent seeking: The neo-Weberian critique has focused on the failure of African states to establish them- selves as rational-legal institutions and to rise above the patrimonialism that affects all of them, regardless of their ideological claims and the moral rectitude of individual leaders. Going back to the functions that modernisation had assigned to the state, the neo-Weberian highlights the flawed nature of the performance of the post-independence state, especially in its relationship with a society at large from which it has not been able to distance itself ade- quately so as to perform efficiently. In these accounts, market failure central to develop- ment economics and government failure central to neo-classical economists are replaced by something more debilitating and more recalcitrant societal failure signalled not only by lack of social capital, but also by the disease-like spread of this societal malaise into both market and state structures. Termite-like, Africa’s primordial and patrimonial relationship (what Göran Hyden (1983: 21) refers to as the economy of affection) has eaten into the very core of the edifice of modern administration rendering it both weak and incoherent. Mired in redistributive activities imposed by affective relations, prebendalism or clien- telism, so the argument goes, the state has not been able to provide the bureaucratic order and predictability that capitalists need if they are to engage in long-term investment. To the Asian autonomous state is juxtaposed the African lame Leviathan (Callaghy, 1987), which is so porous and penetrated by society, so beholden to particularistic interest groups, so mired in patron-clientelist relationships, and so lacking in stateness it cannot pursue the collective task of development, which demands insulation from such redistributive demands. It is these relationships that constitute what Bayart (1993) terms the politics of the belly that has paralysed African economy. The most cogently stated of these critiques is that of public choice school with the work of Bates (1981) being the single most comprehensive statement of the critique as far as Af- rica is concerned. Essentially this critique starts from assumptions of how unregulated markets work. In general, these markets are said to operate in a Pareto optimal way in the sense that the allocation of resources that they generate is such that it can only be improved upon by making somebody worse off. Given that markets work well, why are market distor- tions by the state tolerated or generated? In Bates’ work, the answer lay in the rational pur- suit of self-interest groups by organised individuals who pushed the state to adopt policies that generated rents for them. The state was then essentially a rent generating institution that inhibited efficient allo- cation of resources. In this literature rent seeking invokes the expenditure of resources to capture artificially created rents. It should be stressed that the point of departure of rent seeking literature is the perfect market. In real life and, indeed, by this definition, rent would be ubiquitous in any situation in which a state existed to safeguard or transfer rights. Like neo-patrimonialism, rent seeking is used in a procrustean manner so that it ultimately assumes the character of a bogeyman. While the concept points to something real in most economies, it has been made to carry more than it can bear. This has been partly because of8 |Policy and Institutional Reforms in Developmental States, BTC 2011
  11. 11. Costantinos the anti-statist ideology to which it has become tethered making it serve as an ideological weapon in the statephobia that neo-liberalism has cast so broadly, and partly because of the protean definition assigned to it so as to include anything from Mafia-like activities to the protestations by the Chamber of Commerce over pieces of legislation. In the case of Af- rica, rent seeking is conflated or used interchangeably with corruption, patron-clientelism and even the extended African family. Rent seeking9 usually involves redistribution of income from one group to another. The effect of such redistribution on growth depends on its impact on incentives and the use to which the winners put the surplus in their hands. As Catherine Boone (1994) notes in the case of Senegal, rents can constitute a form of primitive accumulation, as can be inherited wealth or any form of windfall profit. She observes that, for the emergence of African capi- talism, the key question is: will wealth collected in the form of rents be transformed into capital through productive investment? Other than the easy come, easy go thesis, there are no a priori reasons to believe that only the wealth earned by one’s blood, sweat and tears will be used productively. The rent seeking literature in Africa has tended to blur the distinction between mi- cro-economic distortions and macro-economic balances, tending to believe that the latter was the logical consequence of the former. It is now generally evoked against active policy making even in directions that have been theoretically and empirically demonstrated to be beneficial. It has become the great caveat that brings the apparently inexorable logic of market failure to a dead halt. In addition yet many of the policies attributed to rent seek- ing and identified as the cause of Africa’s failure have been and are still in use by the HPAEs to good effect. In other words, while micro-economic distortions were costly, what eventu- ally drove many import substituting countries to ruin was not so much the inefficiencies in- duced by rent seeking, but macro-economic imbalances that are not easily attributable to rent seeking groups. Even in the context of new growth theories, we simply do not have evidence on the pre- cise channels through which rent seeking adversely affects such variables as growth, if at all. In looking at some of the advice given to African countries, it turns out that what are wrong are not rents per se but rents attached to a wrong strategy. This partly explains why advocates of export-oriented strategies admit, albeit surreptitiously and reluctantly, to the need to deploy rents to stimulate export-oriented industries. In the push for exports to- wards which Africans are now being urged, it is suggested that governments provide selec- tive confessional credits, export subsidies, etc. This involves creating rents in these new ac- tivities. It is not clear why these rents will not induce as much lethargy as those given for import substitution industry. Rents can be either productive or unproductive in their in- centive impact. In most models it is assumed that rents are exogenous to the individual firm. They are out there and the firm allocates resources to get them. It follows from this assumption that such an allocation will leave fewer resources for productive investments. However, once the assumption of exogeneity is dropped and once we assume instead that the level of rents a firm gets depends on the size of the firm’s activities, the story changes and we get an entirely different dynamics in which rent is a function of the firm’s perform- ance. The pursuit of rents can lead to expansion of productivity, spurring growth as rentiers attempt to capture more rent. The Asian use of rent seeking to spur firms to expand and ex- port echoes this endogenisation of rents. The dependency on rent earned on investment has been used as an instrument by governments to raise the profitability of investment in se- lected economic activities. 9 Rent-seeking, a phrase coined by economist Gordon Tullock, means cutting a bigger slice of the business rather thanexpanding the business and trying to make more money without producing more. Classic examples of rent-seeking are aprotection racket taking a cut from the shopkeeper’s profit; a cartel of firms that control prices; workers demanding higherwages without offering any increase in productivity; and lobbying the government for tax, spending or regulatory policiesthat benefit a few. Whether legal or illegal, as they do not create any value, rent-seeking activities can impose large costs onan economy. Rent has two different meanings for economists: the first is the income from hiring out land or other durablegoods. The other is a measure of market power: the difference between what a factor of production is paid and how much itwould need to be paid to remain in its current use. In a competition, there are no economic rents, as new firms enter a mar-ket and compete until prices fall and all rent is eliminated.9 |Policy and Institutional Reforms in Developmental States, BTC 2011
  12. 12. Costantinos This case is well argued by Akyüz (1996). He advances the proposition that the creation of rents and the pushing of profits over and above those that would be attained under free market policies were central to the process of accelerated capital accumulation and growth and establishing of new industries by providing a profit-investment nexus that undergird the high corporate savings and investments of Asia. He suggests five reasons for the success in the linking of rent creation to promotion of industrialisation. • Rents were achievable through activities which served national interests. • Rent seeking costs (information, influence peddling, etc.,) were kept low. • Governments acted to close off non-productive channels of wealth accumulation such as urban real estate speculation. • Rents were provided on a selective and temporary basis and withdrawn as new in- dustries became mature enough to compete internationally. • The realisation of rents was related to performance standards. The point of the Asian experience is that the use of rent seeking as an argument against a more active developmental state is simply not credible. The relevant issues are rents for whom and with what reciprocal obligations for receivers of such rents? In addition the an- swer will lie on the desired income distribution and strategy of development. The denial of an active developmental state for fear of capture is tantamount to the denial of the possi- bilities in Africa of accelerated development achieved by a deliberate government of the market towards greater mobilisation and developmental allocation of resources (including rents). In the African debates, the fear of the damaging effects of rent seeking has not only sustained the argument for a minimalist state, but has also given the foreign experts, who for inexplicable reasons do not engage in rent seeking like all other mortal beings, a moral upper hand. Both the rent seeking and neo-patrimonialism argument have been used to seek more autonomous states by suggesting that the key to Asian states was such insulation. Analysis by institutionalists suggests that the view of the autonomy of the state in the Asian miracle countries is an oversimplification and the argument for state technocracies pursuing devel- opment in complete isolation from societal pressures is a myth and is not empirically founded. In the seminal work on developmental states, Chalmers Johnson (1981) underlined as a crucial feature the intimacy of their relationship with the private sector and the inten- sity of their involvement in the market. Subsequent writing on other developmental states has underscored this point leading to the useful, albeit problematic, notion of embedded autonomy to describe the nature of state autonomy in these societies as circumscribed by the dependence of the state on the activities of businesses for its development project (Ev- ans, 1992).6. A Global Order emerging: A new worrisome impossibility theorem comes from debates on globalisation as eerily reminiscent of earlier dependence arguments. The argument is that the current order does not allow many of the policies that constituted the core of the activities of developmental studies. Protection of industries, financial repression, export promotion subsidies are now ruled out by current WTO arrangements. 6.1. self-fulfilling predicaments: The significance of these impossibility arguments is that the discursive framework they have engendered has produced a knowledge that has been acted upon by key policy-makers in a self-fulfilling manner. The consequence of these perceptions of the state has been a set of self-fulfilling predicaments. They have led to a set of measures that have so maladjusted African states that they provide proof of the impossibility theorems. To avoid clientelism and rent seeking, the state is squeezed fiscally and even politically. This weakened state then exhibits incapacity to carry out its basic functions (partly because of demoralisation, moonlighting by the civil servants, corruption, etc.). This is then used to argue that the state in Africa is not capable of being developmental and therefore needs to be stripped down further and be buffeted by legions of foreign experts. In addition so we witness in Africa the reinforcement of policies that continue to erode the economic and political capacity of the10 |Policy and Institutional Reforms in Developmental States, BTC 2011
  13. 13. Costantinos state even as considerable noise is made about good governance and capacity building, and it to this that we now turn. 6.2. rolling back the state: One central tenet of adjustment has involved rolling back the state. While it is true that any kind of response to the fiscal crisis of the state may have justified drastic reductions in state expenditure, both the cognitive framework through which the problem was based and the actual solutions proposed led not so much to the rolling back of the state but to a dras- tic erosion of its capacity as a state. The intention was to create what Johnson (1987) char- acterised as a soft authoritarian state whose main task was to create an enabling environ- ment for the private sector by augmenting market rationality, reducing risks and uncer- tainty but not engaging in market distorting interventions that characterised policies of Asian developmental states. While the literature on downsizing has always assumed the simultaneous introduction of performance enhancing measures, the reduction of the civil service in Africa has usually gone hand in hand with declining real wages and uncertainty even for those that remain on the payroll. The effect of all this is captured by Janice Aron thus: (1996:117). The state in Africa has come full circle to the small government of pre-colonial days; but with the additional hysterisis effect from past shocks of a seriously depleted current institu- tional capability, deterioration in the current quality and scope of social services and infra- structure provision, coupled with a fiscal position highly vulnerable to changes in aid Apparently alarmed by the damage its proscriptions have caused, the World Bank has become more cautious in its pronouncements about the downsizing of the civil service. A World Bank study noting that among developing countries sub-Saharan Africa had the low- est government employment as a percentage of the population, had the following observa- tions: (Schiavo-Campo, 1996). In many countries in sub-Saharan Africa, the civil service has sharply deteriorated in almost every way since the 1970s. Beginning in the 1980s, a succession of fiscal stabilisation programs has reduced government employment in Africa to the lowest level of any developing region. Thus, although additional downsizing may be necessary in some countries, most do not need to shrink the workforce but to overhaul the entire civil ser- vice system No wonder capacity building is now a major buzzword in the donor community. It de- rives partly from the view that Africa’s institutions of governance are weak or inappropriate in some sense or other, and that, where the institutions are appropriate, the personnel managing them are poorly trained. This leads to a significant role of technical assistance in aid packages and capacity building programmes for individual African states. The capacity building project is the new justification of technical assistance even as international organi- sations bemoan their own preponderance in the formulation and implementation of poli- cies in Africa.10 While the need for curbing authoritarian states is understandable, the inca- pacitation of the state has been extended to democratically elected ones largely the anti- state ideology rarely distinguishes between democratic and authoritarian ones. Indeed, in some of the literature it is suggested that neo-patrimonialism and rent seeking will be ac- centuated by democracy. Consequently, the designs are to impose restrictions on the new democracies by multiplying the number of authoritarian enclaves (e.g. independent central banks) that lie outside the purview of democratic politics and to limit the choices of elected bodies. (Mkandawire, 2006).7. New public management (NPM) 7.1. NPM: Of relevance to the developmental state are NPM management techniques and prac- tices drawn mainly from the private sector, is increasingly seen as a global phenomenon. NPM reforms shift the emphasis from traditional public administration to public manage- 10 The brain drain afflicting many African countries is evidence of the fact that low morale and poor pay, ratherthan technical competence, are the main problem of the civil service in Africa today — itself the consequence of ananti-state ideology. Rather than on capacity building, focus in Africa should first and foremost be on valorisation ofexisting capacities through better capacity utilisation and retooling of the civil service, reversing the brain drain andrepairing the main institutions of training that have been starved to death even as donors set up new ones to produceparochial skills required in their new projects.11 |Policy and Institutional Reforms in Developmental States, BTC 2011
  14. 14. Costantinos ment. Key elements include various forms of decentralizing management (e.g., the creation of autonomous agencies and devolution of budgets and financial control), increasing use of markets and competition in the provision of public services (e.g., contracting out and other market-type mechanisms), and increasing emphasis on performance, outputs and customer orientation. NPM reforms have been driven by a combination of economic, social, political, and tech- nological factors. A common feature of countries going down the NPM route has been the experience of economic and fiscal crises, which triggered the quest for efficiency and for ways to cut the cost of delivering public services. The crisis of the welfare state led to ques- tions about the role and institutional character of the state. In the case of most developing countries, reforms in public administration and management have been driven more by ex- ternal pressures. They have taken place in the context of structural adjustment programmes and PRSPs. Other drivers of NPM-type reforms include the ascendancy of neoliberal ideas from the late 1970s, the development of information technology, and the growth and use of international management consultants as advisors on reforms. Additional factors, in the case of developing countries, include lending conditionalities and the increasing emphasis on good governance. Until recently, NPM was largely seen as a developed country, particularly Anglo-Saxon, phenomenon. The 1990s have, however, seen applications of variants of NPM techniques and practices in some developing and transitional economies. Elements discussed in this paper include management decentralization within public services, downsizing, perform- ance contracting, contracting out, and user charges. These are being applied in developing states, but not in a very comprehensive and consistent manner. Downsizing and user fees have been most widely introduced, especially in Africa, and have been closely associated with structural adjustment programmes. Autonomous agencies within the public sector are being created in some countries. Performance contracting and contracting out have become common policy options in a number of crisis states. The latter has been adopted as an instrument to reform SOEs, grant- ing SOE managers more operational freedom while holding them accountable for the per- formance of the enterprises through a system of rewards and sanctions. Performance con- tracts are used across a number of sectors including utilities, transport, telecommunications, and agriculture (e.g., in Ghana, Bolivia, Senegal, and India). Contracting out is increasingly being adopted in the delivery of public services including urban services, ancillary health services such as cleaning, laundry and catering and road maintenance. While the adoption of these NPM practices seems to have been beneficial in some cases, there are both potential for and real limitations to applying some elements in crisis states. The limited experience of NPM in such states suggests that there are institutional and other problems whose persis- tence may be binding constraints on implementation. The capacity concerns include the ability to manage a network of contracts, the monitoring systems, and the difficult govern- ance and institutional environment, which may constrain implementation capacity. 7.2. The Washington Consensus: The Washington Consensus which was meant to reinforce the above, included ten broad sets of recommendations: fiscal policy discipline, redirection of public spending from subsidies, pro-poor services, tax reform, interest rates that are mar- ket determined and positive in real terms; competitive exchange rates, trade liberalization, liberalization of inward foreign direct investment; privatization of state enterprises, deregu- lation, prudent oversight of financial institutions, and legal security for property rights. The Washington Consensus has been the target of sharp criticism by some individuals and groups who argue that it is a way to open up less developed countries to investments from large multinational corporations and their wealthy owners in advanced WWI economies, which the critics would view as a negative development. Critics frequently cite the Argentine economic crisis of why they believe that Consensus policies are flawed, as they argue that Argentina had previously implemented the Consensus’s policies as directed. 7.3. The new structural economics, what can be different? 7.3.1. The new structural economics outlines a framework to complement previous ap- proaches in the search for sustainable growth strategies as follows12 |Policy and Institutional Reforms in Developmental States, BTC 2011
  15. 15. Costantinos • First, an economys structure of factor endowments evolves from one stage of de- velopment to another. Therefore, the optimal industrial structure of a given economy will be different at different stages of development. • Second, each stage of economic development is a point along the continuum from a poor agrarian economy to a rich industrialized economy, not a dichotomy of two stages (poor versus rich or developing versus industrialized). Industrial up- grading and infrastructure improvement targets in developing countries should not necessarily draw from those in rich countries. • Third, at each stage of development, the market is the basic mechanism for effec- tive resource allocation. However, economic development as a dynamic process requires industrial upgrading and corresponding improvements in hard and soft infrastructure at each stage. Such upgrading entails large externalities to transac- tion costs and returns to capital investment. Thus, in addition to effective market mechanisms, government should play an active role in facilitating industrial and infrastructure improvements. 7.3.2. The GTP envisages, among other things, a minimum gross domestic product (GDP) growth rate of 11%, doubling agricultural output, and fulfilment of all the MDGs, massive infrastructural and industrial development and exports. GDP Growth and MDG s MDG Status Sector 04/05 - 09/10 Average Target 2009/10 Actual Agriculture and Related Sector 8 7% 6% Industry 10 Service 14.6 Total GDP 11% 7% to 8% 10.10% Ethiopian Performance and Plan Goal 1 Target 04/05 09/10 14/15 Target 1: Reduce by half the proportion of people living Eradicate Ex- on less than a dollar a day 39 29 treme Poverty Target 2: Reduce by half the proportion of people who and Hunger suffer from hunger 38 28 GDP Growth 2009/10 - 2014/15 GDP Growth 2009/10 Minimum Maximum Agriculture and Related Sector 6 8 14.9 Industry 10.2 20.1 21.4 Service 14.5 10.5 12.8 Total GDP 10.1 11 14.9 GDP Share 2009/10 - 2014/15 GDP Share 2009/10 Minimum Maximum Agriculture and Related Sector 41 35.8 41 Industry 13 19 16.8 Service 46 45.2 42.2 Total GDP 100 100 100 Total Consumption, Investment, and Resource Gap at current price 2009/10 2009/10 - 2014/15 Total consumption, investment, resource gap at current price Plan Actual % Minimum Maximum Total Consumption Expenditure 89.1 90.6 -2 82.6 78.1 Ambitious Total Investment 22.8 23.7 -4 31.5 31.1 Ambitious Total Export 16.6 10.5 63 12.5 11.8 Total Import 11.7 27.3 -133 26.7 21.6 Resource Gap 6.6 16.8 -155 14.1 9.8 Total National Saving 10.9 9.4 14 17.4 21.3 Ambitious 7.4. Trade and Investment Policy Priorities: The surprise devaluation of the birr on Au- gust 31, 2010 from a value of 13.63 to the US dollar to 16.3511, which was apparently not taken under duress but rather to boost export performance, represents an important rec- 11 See, National Bank of Ethiopia, Inter-bank Daily Foreign Exchange Rate in USD); athttp://nbebank.com/market/dailyexchange.htm, accessed, September 21, 2010.13 |Policy and Institutional Reforms in Developmental States, BTC 2011
  16. 16. Costantinos ognition by the Ethiopian government that its policy setting had been a factor in inhibit- ing Ethiopia’s external performance. However, by itself, this move falls short of address- ing the problem, which, as outlined above, reflects numerous and complex factors. In the first instance, given the role that the exchange rate peg had played in promoting domestic price stability, the most recent devaluation, which follows on the heels of a sequence of previous devaluations over the past two years, leaves open the question of the strategy the government will follow to maintain macroeconomic stability while it seeks to boost export performance (see for example some of the discussion surrounding the recent devalua- tion12.) Moreover, it is not out of the question that the devaluation alone might prove to be disappointing in terms of its impact on trade performance, both in the very short term due to a “J-curve” response whereby the trade balance initially deteriorates as import costs are driven up while the export response is slow to take effect, and even in the me- dium term depending on the response of imports and exports to the lower cost of Ethio- pian goods relative to imports. Accordingly, a more comprehensive policy response, sustained over the medium term, is required to redress a situation generated by years of policy settings inimical to good export performance. The following is a suggested package of measures to pursue over the coming years: Adjusting the monetary policy mix, Expanding Ethiopia’s industrial supply capacity, Reducing trade costs, Supporting Measures: Progress on the three priority ar- eas outlined above is the key to achieving the transformational goals of the Growth and Transformation Plan—even if the ambitious growth targets are not met, success on the transformational element would be a great accomplishment. There are several other measures that would support the development of an internationally competitive export base in Ethiopia: improving producer services, developing connections with immediate neighbours and regional trade agreements. (Dan Ciuriak and Claudius Preville (2010)8. Can Ethiopia nurture a developmental state? The East Asian financial crisis dealt a seemingly mortal blow to the image of the region gen- erally and to its distinctive patterns of state-business relations in particular. Not only were such relationships routinely disparaged as forms of ‘crony capitalism’, and synonymous with corrup- tion and inefficiency, but they were seen as incompatible with the sort of dynamic competitive pressures associated with ‘globalisation’. In short, the sorts of business structures, political prac- tices and social relations that had formerly been seen a sources of competitive advantage in countries like Japan, were now seen as self-serving obstacles to necessary change. In order to as- sess the merits of this debate, we need to carefully assess the theoretical and pragmatic argu- ments that were made in support of an effective developmental state, before considering whether such a model is any longer useful. We also need to remember that different countries will inevi- tably confront very different historical circumstances and developmental challenges, something that makes generalisation more difficult. The key to an effective developmental state is state capacity, or the ability to formulate and implement developmental policies. For a state to achieve such an outcome it not only needs a competent bureaucracy, it also needs an effective relationship with the domestic business class that will inevitably be at the centre of any successful developmental initiatives. In an influential comparative study of industrialisation in Asia and Latin America, Peter Evans coined the term ‘embedded autonomy’ to describe the ideal relationship between would-be developmental state’s and the indigenous business class. Evans, Peter (1995) Adopting a neo-Weberian typology, Ev- ans argued that the successful developmental state needed to be both close to, and distant from, the business class it sort to influence and nurture. In other words, the state had to be sufficiently embedded in society so that it was capable of implementing its goals by acting through social in- frastructure, but not so close to business that it risked ‘capture’ by particular interests and was thus incapable of acting in the wider ‘national interest’. Ideally, the effective developmental state should be ‘embedded in a concrete set of social ties that binds the state to society and provides institutionalised channels for the continual negotiation and renegotiation of policies’. (Evans, p 12) 12 For example, see Arvind Subramanian’s blog entry of September 3, 2010, “Ethiopia’s Experiment” athttp://blogs.cgdev.org/globaldevelopment/2010/09/ethiopia%E2%80%99s-experiment.php14 |Policy and Institutional Reforms in Developmental States, BTC 2011
  17. 17. Costantinos Once again, Japan provides the quintessential exemplar of all that can go right – and wrong – with the developmental state. When trying to assess why Japan - and much of the rest of East Asia, for that matter - has not realised these expectations, it is important distinguish between those factors that may have undermined the utility of the developmental state from within, and those that have affected it from without. In Japan’s case, much of the damage appears to have been self-inflicted. On the one hand, the very relationships that were formerly considered to be integral parts of the Japanese success story, especially close state-business relations, are now seen as fundamental obstacles to reform. Critics cite the frequently corrupt relations that exist in key industries like construction, the way such relationships become a drain on the public purse, and the manner in which these formerly functional patterns of interaction have ossified into self- serving obstacles to reform. (Beeson, Mark, 2003) The big question is whether the distinctive forms of state-driven capital formation and accu- mulation found in Ethiopia can survive in the face of sustained reformist and competitive pres- sures. Although governments in East Asia have been reluctant to relinquish some of the eco- nomic controls and policy tools that served them well in earlier phases of development, the in- tense pressure to conform with pervasive international regulatory standards and liberalise key sectors of the domestic economy, like finance, has set in train major structural changes which may fundamentally undercut the capacities of developmental states. 13 The provision of credit, for example, formerly a powerful form of state leverage over domestic business, is no longer criti- cal in an increasingly liberalised, integrated international financial system where access to global capital markets is a fact of corporate life. But it is not simply the capacity of the developmental state to implement policy that is in question: a more fundamental and possibly damning criticism of the developmental state is that bureaucratic elites are simply incapable of guiding the developmental process beyond a certain critical point. In the initial phases of the developmental project, the aspiring developmental state can – if it has the requisite capacity and vision – ‘catch-up’ with the existent industrial powers. This was the fundamental insight of Gerschenkron’s influential study of ‘late’ development: countries following in the wake of the early industrialising nations had the opportunity of repli- cating successful strategies, borrowing key technologies, and generally accelerating the course of industrialisation. (Gerschenkron, A., 1966) In Japan, South Korea and Taiwan, where the course of development had to a significant extent been laid out by earlier industrialising nations, the suc- cessful and rapid catching-up process was testimony to the effectiveness of the developmental state. Does the developmental state have a future in Ethiopia? All states are being affected by global processes. The internal institutional architecture of formerly discrete national polities is being reconfigured by internal and external pressures from ‘above and below’, with new networks of power and coordination emerging as a consequence – networks that frequently transcend national borders and contain a mix of state and non-state ac- tors. (Jayasuriya, K., 1999) Those states that have the potential capacity to respond most effectively to the specific challenges of an increasingly integrated international economic order are generally ‘post-development’. This is unsurprising: it has been the existence of effective state capacity that has been the critical historical variable that accounts for development in the first place. Such considerations suggest a number of important conclusions: • Historically, successful economic development has been reliant on the actions of a devel- opmental state with effective state capacity and willingness to use it in pursuit of devel- opment goals; • The evolving international regulatory architecture and prevalence of neolib- eral ideas have created a less hospitable environment for developmental states. Those countries that lack the sort of state capacity and leadership associated with 13 Ironically, it was the liberalisation of domestic finance and the withdrawal of regulatory oversight that was a key com-ponent of both the East Asian crisis and the difficulties Korea faced as a consequence of liberalising reform initiatives.(Wade, R and Veneroso, F., 1998) Two further general points about ‘deregulation’ are worth emphasising: first, even neolib-eral capitalism is regulated (Cerny, P. G. 1991) – the crucial question is about its quality, the motivations of those chargedwith enacting it. Secondly, we cannot assume that private sector ‘self-regulation’ will be any less corrupt as America’s recentproblems remind us. (Krugman, Paul, 2002)15 |Policy and Institutional Reforms in Developmental States, BTC 2011
  18. 18. Costantinos the developmental state will find it difficult to break out of subordinate positions in the global economy. Yet the existence of potential state capacity is not in itself a guarantee that it will be effectively utilised or that it will not become an obstacle to, rather than a catalyst for, change, especially where the developmental state has accomplished its mis- sion; • The state continues to play a critical role – for better or worse – in determining the posi- tion of national economic spaces and labour forces in the global economy. In some ways, therefore, the debate about the developmental state is miscon- ceived: all states are developmental in the sense that government policy is designed to encourage economic growth; the perennial question remains about the best way to achieve this, especially for economies that are ‘under-developed’. The developmen- tal state in East Asia has been a critical part of that region’s remarkable and real transformation, despite the fact that there are important differences between the experiences and capacities in the North and South. Whether the developmental state can remain functional, free of capture by particularistic economic, ethnic or political interests, or capable of guiding the post-development process is a moot point. But its historical role and potential efficacy for those at the bottom of the global economic hierarchy is not in doubt. In light of the above, what might such state capacities look like? Despite the World Bank’s as- sociation with market, rather than state-led development, but theoretically sophisticated report, The State in a Changing World, highlighted many of the potential positives of state inter- vention. Significantly, the report acknowledged the continuing role states can play in accelerating targeted economic development through industry policies, subsidies and effectively monitored business-government relations, and by investing in basic social services and infrastructure. Cru- cially, it also highlighted the dangers the developmental state is prone to and the need to provide ‘incentives for public officials to perform better while keeping arbitrary action in check’. (World Bank, 1997) Thus the fashionable mantra of institution and capacity building has some merit, but so does the fundamental recognition of the continuing importance of the state – especially in responding creatively to the multiple challenges of globalisation. In both the developed and the developing world, good policies are clearly better than bad. (Beeson, Mark, 2001) While we might all agree that investment in education, encouraging the development of more valuable economic process, and curbing excesses in both the private and public sectors are ‘good things’, achieving them has al- ways been the challenge. It remains so. It is, however, one in which states remain inextricably en- twined.9. Conclusion and recommendations 9.1. The Developmental State and avoiding its pitfalls: A developmental state is defined as “a state that puts economic development as the top priority of government policy, and is able to design effective instruments to promote such a goal”. The instruments should include the forging of new formal institutions, the weaving of formal and informal networks of collaboration amongst citizens and officials and the utiliza- tion of new opportunities for trade and profitable production”. It is thus understood as an interventionist state, which can identify national priorities, set targets, develop strategies, facilitates coordination among various sectors and stakeholders, and establish the monitor- ing mechanisms for achieving development goals, by clear economic and social objectives that influence the direction and pace of development. The developmental state approach focuses on rebuilding and strengthening state capac- ity with a view to raising its ability to expand human capacity and promote equitable and ef- ficient allocation of resources: effective political, economic, and social institutions, the re- cruitment and retention of competent public servants, a framework that ensures wider stakeholder participation in policymaking and implementation. Such a capable state is be- lieved to be able to spur informal businesses to enter the formal sector, macro and micro- economic policies that ensure economic diversification and transformation, build and strengthen economic and socio-political institutions, and coordinate them effectively. Un- checked intervention, which is beyond the level needed to correct market failure that risks efficient resource allocation.16 |Policy and Institutional Reforms in Developmental States, BTC 2011
  19. 19. Costantinos The entire state apparatus may be captured by elites or powerful special in- terest groups so that the course no longer reflects those goals derived from democratically organized public deliberations. At a lower level, weak integrity and professionalism may lead to rent seeking, breeding waste and inefficiency. Inappropriate behaviour of regulatory agencies: corrupt regulators may be caught by those which are meant to be regulated. Both public and private producers may also find it more profitable to invest resources in rent seeking rather than actual production. Similarly, consumers who re- ceive subsidies may also resell their allocations for gain. Avoiding the pitfalls of state intervention needs enhancing stakeholder participation, es- tablishing democratic deliberative institutions at all levels of decision-making, empowering these institutions to promote stakeholder ownership of development, enhanced citizen over- sight over government activities for ensuring transparency, and sharing of informa- tion...using the market as a supplementary means of maintaining efficiency and motivating economic agents, establishing and empowering regulatory agencies to set and enforce prod- uct quality standards for all producers, establish competition policy and enforce competition law against anti-competitive behaviour by public and private producers, empowering the bureaucracy to transparently determine the extent and allocation of rents, and the terms and conditions for their allocation and elimination, ensuring that the bureaucracy has both the autonomy and capacity to respond quickly to changing local and global situations and forging close, interactive and synergic relations between the bureaucracy and the private sector 9.2. Enhancing the state’s role in transformation: The role of the state in achieving rapid and sustained economic growth and develop- ment combined with deep structural transformation must be channelled through a disci- plined planning approach… The above role is best performed by states that are both devel- opmental and democratic that should build and operationalize these developmental states through the establishment of transformative institutions such as a good constitution, the rule of law, independent judiciary, representative political institutions, effective regulatory institutions good laws and property rights enforcement, a competent and professional bu- reaucracy whose recruitment and advancement are based strictly on merit, an agency charged with the responsibility of overall development planning and implementation, a de- velopmentalist coalition among committed political leadership, the bureaucracy, private sec- tor and civil society around common national development goals. 9.3. De-linking of the state from rent-seekers: One notes how much of the writing on African states bemoans their lack of autonomy. Both the invidious comparisons of African capitalists with idealised capitalists elsewhere and the fear of capture by rent seekers or patron-client networks have led to a negative and naïve view of the interrelation between public power and private interests, a view that pre- empts or precludes the possibility of building positive coalitions between the state and the business community. The presumption is simply that state-capitalist relationship in Africa can only be collusive and not synergistically and mutually reinforcing or benignly co- operative and collaborative. As a consequence, in the African case the call for state auton- omy has been tantamount to a call for isolation by delinking of the state from its social roots while subjecting it to external agents of restraints through a battery of conditionalities and technical assistance. The BWIs have sought to free the state from the capture by distancing it from local vested interests. This alienation s supposed to provide the autonomy in deci- sions that enhance national interests. Compounding matters has been the hijacking of key state functions by international fi- nancial institutions further distancing the state from local capitalists. Indeed, contrary to their self-perception as the guarantors of private capital, the BWIs are a source of extreme insecurity among local capitalists. Wanton liberalisation of markets without careful consul- tation with business classes, privatisation that provides no special privilege to local capital- ists, cessation of directed credit or development finance, high interest rates, all these under- score the distancing of the state from local capitalist interests and the pre-eminent position of IFI’s interests and perceptions in policy-making; whose missions’ coming and going are17 |Policy and Institutional Reforms in Developmental States, BTC 2011